Commentary on Political Economy

Wednesday, 15 July 2020

'We cannot be complacent': G20 leaders warned

James EyersSenior Reporter
Jul 15, 2020 – 11.00pm

The chairman of the Financial Stability Board has told global central bank governors and finance ministers ahead of a weekend meeting that the path of recovery from the COVID-19 crisis "is still uncertain, with a high likelihood of starts and sputters along the way".
Randal Quarles, also the US Federal Reserve's vice-chairman for supervision, said in a letter to the world's economic leaders the pandemic had taken an "unprecedented economic toll" and "we cannot be complacent". "The crisis is far from over and we must not lose sight of the hard work we must do together to support global recovery," he said.
Economic leaders and central bank governors of G20 countries will conduct a virtual meeting on Saturday, to discuss looming risks in the global economy, including liquidity and loan loss stress in the banking system and the impact of credit rating downgrades.
The global hook-up comes ahead of Reserve Bank governor Philip Lowe's address to the Anika Foundation next Tuesday, a speech by APRA chairman Wayne Byres on Wednesday, and the government's economic and fiscal update on Thursday.
Mr Quarles said the crisis has validated post-GFC financial reforms to improve bank resilience, allowing banks to act as shock absorbers rather than amplifiers, and markets had been responsive to "quick and decisive policy actions" including emergency support from central banks.

Corporate debt challenge
Other positives included the use of bank equity buffers to both absorb losses and support lending – which the Council of Financial Regulators has been encouraging in Australia – which he said is "consistent with a well-functioning, prudently managed banking system and with the design and intended functioning of the Basel III framework".
Supervisors would give banks "sufficient time to restore buffers, taking account of economic and market conditions and individual bank circumstances", he said.
Amid the political dislocation in his native US and growing international trade tensions, Mr Quarles urged financial governors to maintain a collaborative approach. "Authorities across the financial sector must develop a shared understanding of our financial system as a whole and build consensus where policy responses may be needed," he said.
The FSB, an international oversight body for the financial system that reports in to the G20, has begun mapping the critical connections between traditional banking and non-bank sectors to clarify "various points of vulnerabilities and risk amplification and transmission in the financial system".
One particular challenge is high levels of debt in parts of the corporate sector, which have increased as some companies have borrowed more to navigate the crisis, raising solvency concerns for some borrowers.
Global regulators are also grappling with the risk of further liquidity stresses and bracing for volatility in markets, which has subsided recently, to return.
"We may be seeing significant pricing disconnects between the market and economic fundamentals, which could result in sudden and sharp repricing," Mr Quarles said.
"The impacts of these economic strains may be amplified in emerging markets, given the risks to their currency and debt markets from capital outflows."
The FSB report on financial stability measures taken during the crisis comes as S&P Global Ratings said on Wednesday that risks for Asia-Pacific banks are "firmly on the downside", with the region set to lose $US2.7 trillion of economic output in 2020 and 2021.
"The extent of defaults from borrowers, and banks' credit losses, will become clearer when governments unwind fiscal support, and banks end their loan repayment moratoriums," said S&P credit analyst Sharad Jain.
"We expect most institutions in the region will show a multi-fold rise in credit losses and a sharp drop in earnings in the next two to three years, due to the COVID-19 induced economic downturn."

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